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Legal & General Investment Management (Holdings)

PRI reporting framework 2018

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Process for engagements conducted via collaborations

LEA 05. Process for identifying and prioritising collaborative engagement

New selection options have been added to this indicator. Please review your prefilled responses carefully.

05.1. Indicate whether your organisation has a formal process for identifying and prioritising collaborative engagements

05.2. Describe the criteria used to identify and prioritise collaborative engagements.

05.3. Additional information [Optional]

Pooling of assets with other investors can provide benefits resulting from the large size and scale of the group. We believe the most efficient and effective way of achieving mutual goals on voting and engagement is to speak with one voice. LGIM also uses its voting rights in relation to our collaborative initiatives, as we do for our direct and private engagements. 

Collaboration with other investors is done by the team both formally and informally. A formal collaboration can be initiated through organisations (more details in section LEA 07), and rather more informal collaboration process can take place through the teams’ extensive network of investors and other stakeholders where a common issue is raised.

LGIM utilises collaboration in three different ways to achieve its goals:

Firstly, collaboration is used as an additional tool in LGIMs escalation process to effect change in companies where we have not seen progress through other means. It allows us to raise our concerns about specific companies, topics and approaches with other investors. Raising such issues as a collective voice and demonstrating concern from a significant proportion of the shareholder base is effective for driving change. 

Secondly, other investors and associations approach LGIM to request we lend our weight and scale, as a large global asset manager, by joining initiatives and coalitions on companies.  These are assessed against the team’s strategic priorities, engagement themes and materiality.  Such forums allow us to share resources efficiently and the corresponding collaboration enables us to monitor and influence a broad range of topics, issues and companies globally.  We contribute to the dialogue and aim to change corporate behaviour by applying collective pressure.

Finally, collaboration allows LGIM to bring about change in the market as a whole on thematic issues. Working with other like-minded global investors is important and essential for us to achieve our desired outcomes at a macro level.

Example: LGIM’s leading role on a collaborative engagement initiative on board independence in Japan.

We believe that board independence is an essential element of a well-functioning board. It ensures directors have an independent and trusted judgment and that board discussions remain diverse to ultimately help on building sustainable, long-term performance.

In 2014, we launched a collective engagement initiative with other institutional investors to push companies to have at least one third of their board consisting ofindependent board members.

Focused and consequential collaborative engagement has proven successful. Many companies introduced outside directors to bring them in line, or even exceed this target. However, believe that institutional investors still need to play their role and further encourage improvement of board independence levels of Japanese companies.

We have therefore launched a collaborative engagement initiative with two other UK investors and one US institutional investors which consists in  of coordinating our engagement activity to push for more independence on Japanese boards, including the coordinated use of our voting power for more impact.

We collectively wrote a letter in English and Japanese to the Presidents, Chairman and independent Directors of 32 companies. This initiative was publicised in the Nikkei Asian Review. LGIM also met with eight Japanese companies together with other investors in April to keep momentum going with direct engagement with Japanese boards.

Challenges still remain in the region as many companies need to improve the composition of their boards in terms of independence but also in terms of skills and experience. The role of investors, and in particular at local level, is crucial in changing the dynamic. We will continue our individual and collective engagement activity with Japanese companies going forward.

LEA 06. Objectives for engagement activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.

06.1. Indicate if you define specific objectives for your engagement activities carried out collaboratively.

06.2. Indicate if you monitor the actions companies take during and following your collaborative engagements.

06.3. Indicate if you do any of the following to monitor and evaluate the progress of your collaborative engagement activities.

06.4. Additional information. [Optional]

Collaborative engagement may be initiated for a variety of reasons described above In question LEA 5.3.The corporate governance team makes sure clear and specific objectives are set at the start of each collaborative engagement and reviewed throughout the engagement process.

We actively participate and contribute to collaborative engagement activities whether we lead them or join them. As mentioned above, LGIM uses a data management system throughout the engagement process with companies which the corporate governance team updates every time key new information on engagement is received. This includes a ‘success’ functionality which enables us to flag successful engagements. By playing an active role in collaborative engagements we often receive updates directly from companies. Where this is not the case, we keep updated on progress of any collaborative engagement activity through contact with other members. For more details on how we record and keep track of our engagement meetings please refer to question LEA 10.2.

Progress on engagement activity is peer reviewed at weekly team meetings and monthly individual meetings with the Director of Corporate Governance or Head of Sustainability and Responsible Investment Strategy. The regular review process ensures engagement is progressing as expected or requires escalation. This is also a way for the team to share lessons learned from engagement. Where an engagement is unsuccessful, the team assesses the reasons and develops a new approach to engagement.

As mentioned in our answer to LEA 04.4 information gained from collaborative engagement is shared with investment teams as long as it is not sensitive, as per the process detailed in our answer.

Example of how we have monitored and evaluated progress in a  particular collaborative engagement:

We have consistently engaged with the company since 2012, raising a variety of issues including strategy, climate change reporting, board structure – including climate change expertise, governance and remuneration. However,  we identified a lack of progress as the engagement meetings with the company were not leading to changes. This was observed through regular analysis of the company ESG data (including company communication, ESG proprietary tool and third party data) in preparation of various engagement projects, both thematic and reactive.

We have most recently escalated our engagement on climate change and governance issues by collaborating with a small group of investors and asset owners. We set out our engagement objectives with the group. In light of international commitments under the COP21 Paris Agreement, investors need assurance that the business models of companies they invest in are robust and viable over the long term.

As part of this collaboration we discussed the various climate change shareholder proposals on the agenda for AGM in 2016, including the resolutions to acknowledge the imperative for a 2 degree limit and to report on the impacts on the business of a 2 degree scenario being met. We met in person and explained that we had publically committed to voting in favour of both proposals as we did not feel that the company’s current disclosures were sufficient. We also pressed the point that the language the company has used in relation to this issue has been overly negative, suggesting that the company is not in support of policies which are aligned to the global goals and ambitions.

We recorded two successes in our Salesforce platform at the beginning of 2017. Firstly that the company announced in January 2017 that it appointed a scientist to its board in response to concerns on climate change, which is something we pushed for years and also as part of our collaborative engagement. Secondly, that the company added to its website in December 2016 its commitment to the 2 degree scenario.

Similarly to 2016, in 2017 we pre-disclosed our voting intention on the 2 degree scenario resolution as we considered the resolution at such a high profile company to be very influential and were keen to illustrate its importance and our commitment to this critical issue.  We engaged with the company ahead of the 2017 AGM explaining our expectations on this resolution as well as other governance concerns such as the lack of access to company board members and specific environmental expertise on the board.  All our discussions with the company and various emails from the company or our group of investors were recorded in our data management system Salesforce.

In 2016 38% and in 2017 62% of shareholders supported the proposal requesting a report on impacts of a 2 degree scenario. The passing of the resolution in 2017 was significant as the first time this resolution has gained majority support.  We engaged with the company after the AGM explaining the detail of the report we expect to see and that their current reporting does not go far enough. The company subsequently issued a regulatory filing explaining that it would introduce enhancements to its reporting, including analysis of the impact of policies designed to limit the increase in global temperatures to 2 degrees. They followed with a report publication. This has now been recorded in our data management system Salesforce as a successful engagement. We will monitor implementation of these changes and shall give our feedback to the company.